IORP sponsor covenant plan no better for DB than Solvency II

The European Insurance and Occupational Pensions Authority's consultation on changes to the Institutions for Occupational Retirement Provision directive suggests it will explicitly value a sponsor covenant and the existence of the Pension Protection Fund when regulating scheme funding plan.

The consultation, launched yesterday, allays fears Solvency II-style capital requirements would be applied blindly to the pensions industry but it failed to win over industry figures who warn valuing covenants could be just as costly.

Punter Southall head of research Jane Beverley said: "While the apparent move away from a direct transposition of Solvency II requirements onto pension schemes is to be welcomed, it appears that similar tests will still be applied indirectly under the holistic balance sheet approach.

"There is a real risk here that we would simply be replacing one straitjacket for UK defined benefit pension schemes with another."

The consultation makes clear replacing existing IORPs with a "harmonised" regime would mean all "security mechanisms", such as continued support from sponsoring employers, would be recognised when assessing funding levels.

Current directives currently make a distinction between own funded, or Article 17, schemes and sponsor backed schemes.

Towers Watson senior consultant Mark Dowsey said: "The commission asked EIOPA how funding requirements should be further harmonised, not whether they should be.

"EIOPA has thrown some sand in the gears by insisting that the viability of its favoured framework depends on what this would do to the companies and pension funds affected.

"This note of caution will be welcomed by UK employers, who are responsible for more than 60% of the pension liabilities that would be covered by the new rules."

A further suggestion in the consultation, which runs to 517 pages and closes on 2 January 2012, is to limit deficit recovery periods to about 15 years.

Recovery periods in the UK exceeding ten years trigger further investigation by The Pensions Regulator.